By Lou Kilzer and Andrew Conte, Tribune-Review (Pittsburgh), April 10, 2011
Drilling companies rapidly expanding their U.S. operations in places such as Pennsylvania's vast Marcellus shale formation repeatedly tout they are providing American jobs and securing the nation's energy future.
Yet, a Tribune-Review examination found foreign companies are buying significant shares of these drilling projects and making plans for facilities to liquify and ship more of that natural gas overseas.
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Then shale gas came along, and industry and politicians began trumpeting that we have enough gas to last 100 years and suchlike. The hype on shale gas as a silver bullet is pervasive. David Hughes A few analysts believe these predictions of lots of gas - the old "LOG" theory re-invigorated - are seriously overstated. The two most notable are Houston geologist Arthur Berman and Canadian geoscientist David Hughes. Last year Berman released Shale Gas: Abundance or Mirage (presentation). Hughes speaks regularly on this subject. In this letter to the New York Times he throws some cold water on glib and cheerful predictions that America is about to pull itself out of energy dependency. In January, Hughes published Hydrocarbons in North America. Gas prices have been driven back to levels that make shale gas not so profitable, however. The industry is scrambling to reduce costs (the environment is the most frequent victim of this approach, with worker and community safety not far behind) and increase markets (hence the aggressive promotion of natural gas as an alternative road fuel.) And, as with the LNG import boom (a boom in proposed projects, though very few ever came onstream), producers are looking at more profitable markets offshore. Back to LNG, but this time, they are all export terminals. British Columbia has its own huge shale plays in the Horn River Basin, Montney and Cutbank Ridge. EnCana was the first big investor in these plays, but as with all promising resource opportunities, other companies have swarmed the regions. Two of these are Apache, and EOG. Apache, in fact, bought up all of BP's ventures in BC, when BP was liquidating assets last year to pay for the Macondo/Deepwater Horizon catastrophe. One of the LNG import schemes was at Kitimat, on the northern BC coast. When gas prices headed south, that project switched direction. As an export terminal, it drew the interest of Apache and EOG, and they now own the project. Not only that, they have taken over the pipeline project which needs to be built to move the gas from the supply areas in northeast BC to the coast. Construction has not started on either the LNG terminal or the gas pipeline. It is a waiting game, with folks on both sides, betting they will and they won't succeed in finding shippers and customers - necessary requisites before sinking the big bucks into construction effort for both projects, estimated at $5 billion. Support for a "go" decision may have appeared in February with PetroChina's $5.4 billion acquisition of a share in EnCana's Cutbank Ridge shale play. It adds to an earlier $1.1 billion deal between EnCana and Korea Gas. Whether we're talking about British Columbia or the Marcellus Shale, of course, is that the interests of the shareholders of the companies involved will be well served by all this drilling and construction and movement of hydrocarbons. The public interest? The interests of local communities? The energy needs of North Americans? Not so much. |
A leading player in the natural gas grab is China, whose thirst for energy to fuel its industrial explosion is growing rapidly. Others include the governments of South Korea and India, and companies in Great Britain, the Netherlands, Norway, Japan and Australia.
"They're going to come in, extract all this stuff for next-to-nothing, and make global profits off it," said Pittsburgh Councilman Doug Shields. "This is beads for Manhattan, in a global sense."
Much of the salesmanship to promote gas exploration nationwide, and especially in Pennsylvania, pressed the point that the country must become less dependent upon foreign energy sources.
It avoided discussion about exporting that gas overseas.
“The implications are great,” said Paul Cicio, president of Industrial Energy Consumers of America, which represents large U.S. manufacturers. He believes exporting newfound natural gas is a strategic blunder that will cost American manufacturing jobs by hiking the price of gas here.
"This is not good for our country,” he said.
Bill Newman, a New York lawyer who often represents foreign clients, sees things differently. “We have a shortage of capital in this country,” he said. “In the 19th century, the railroads almost broke us.” He said he believes foreign investment in the United States can work like it did in supporting the railroads.
Patrick Henderson, senior adviser on energy matters to Gov. Tom Corbett, said the possible export of Marcellus gas overseas “doesn't hurt the argument that we need to develop the resource.” He said it underscores that the United States needs to develop technology that uses natural gas.
“Exporting is generally a good thing, though our first choice would be to use it here," he said. Corbett doesn't believe Pennsylvania should tax Marcellus shale gas aimed for overseas because it would be difficult “to craft a tax” based on where the gas is used, he said.
The relatively new technology called hydraulic fracturing, or “fracking,” to free gas from deep shale formations is helping America move from importing natural gas to potentially supplying it to the world.
Foreign companies generally are investing in Marcellus shale because they want a good return, rather than assets, said Kathryn Klaber, president of Marcellus Shale Coalition.
"We should be celebrating the foreign investment that is helping to finance domestic energy production and that is benefiting Pennsylvanians in the prices they're paying for energy," Klaber said.
SUPPLY AND DEMAND
Pennsylvania sits above the sweet spot for one of the world's largest natural gas deposits, trapped in a rock layer a mile below the surface known as Marcellus shale. The Marcellus Shale Coalition, an industry trade group, issued a report last week saying the United States could take advantage of that gas by converting more vehicles to use it. Many vehicles in South Korea, for example, are powered by natural gas instead of gasoline.
The United States could become an exporter of liquified natural gas because supply and demand determines gas sales here, whereas sales in Asian markets and Europe are formulated on the price of oil. Sometimes, Cicio said, that works in the United States' favor when oil is cheap, but it can hurt when oil rises in price.
Foreign countries will do what it takes to get natural resources they need, said Mel Packer, an organizer with Marcellus Protest, a citizens group based in Washington, Pa., that opposes drilling because of environmental concerns.
"They're going to buy them where they can get them," Packer said. "If that means buying whole corporations to get the assets, that's what they're going to do."
Two companies — Cheniere Energy Partners and Freeport LNG Development — are seeking government permits to export liquified gas, according to the Federal Energy Regulatory Commission.
A Chinese firm, ENN Energy Trading Co., signed a memorandum of understanding to send 1.5 million tons of natural gas from Cheniere, a Houston-based company operating the Sabine Pass port in Louisiana.
“We are excited to participate in supplying natural gas to China,” Cheniere CEO Charif Souki said in a news release.
Two other port companies are expected to seek permission soon, said Biliana Pehlivanova, a natural gas analyst with Barclay's Capital investment bank in New York. One is Virginia-based Dominion Resources, which has Pittsburgh offices and owns a liquified natural gas terminal and port in Cove Point, Md. The facility could be converted into an export facility for Marcellus shale gas by 2015, but spokesman Dan Donovan said the company has not decided whether to do so and has not sought export permits.
"We are talking to our producers,” he said.
Dominion's Cove Point facility takes in imported liquified natural gas from BP in Great Britain, Shell in the Netherlands and Statoil in Norway. Statoil and Shell are investing heavily in the Marcellus formation.
Last year, Warrendale-based East Resources sold its Marcellus interests to Royal Dutch Shell for $4.7 billion. Last month, Statoil, which has a $3.375 billion partnership agreement with the largest Marcellus leaseholder, Oklahoma City-based Chesapeake Energy, said it might drill as many as 17,000 Marcellus wells over two decades.
Other foreign companies with Marcellus shale interests are Mitsui and Sumitomo from Japan, the BP group from Great Britain, Atinum from Korea and Reliance Industries from India.
CIRCLING NEARBY
The Chinese National Offshore Oil Corporation tried to break into the American energy market in 2005, when it bid $18.5 billion to take over Unocal. It withdrew the offer after a political firestorm on Capitol Hill.
In 2009, CNOOC succeeded in entering the American market, if not exactly on land. It partnered with Statoil on four oil leases in the Gulf of Mexico. This time, no one protested.
In November, Chesapeake announced it would sell a third of its holdings in a Texas shale oil field called Eagle Ford to CNOOC for $2.2 billion. Statoil and Korea National Oil Corporation recently invested in Eagle Ford.
This year, CNOOC took a one-third share of Chesapeake’s leases in two oil and gas fields in Colorado and Wyoming for $1.27 billion in direct costs and drilling expenses.
The Chinese have more connections to Chesapeake, but the extent isn't known. Chesapeake spokesman Jim Gipson said the company generally limits disclosures to those required by regulators.
Last year, Chesapeake said it sold $600 million in convertible preferred shares to “investors in Asia,” without specifying countries. The company disclosed a separate sale of preferred stock to investors including affiliates of the China Investment Corporation, the sovereign fund of the People's Republic of China.
Even though China has interest in American gas, it has untapped shale gas reserves that are 12 times higher than its traditional gas reserves, the U.S. Energy Department said last week.
Pittsburgh geologist Greg Wrightstone said China falls behind when it comes to technology to recover the gas and could learn by partnering with an experienced firm such as Chesapeake.
President Obama and Chinese President Hu Jintao addressed that problem in a formal statement announcing the “U.S.-China Shale Gas Resource Initiative” in 2009.
“The United States is a leader in shale gas technology and developing shale gas resources in a way that mitigates environmental risks," they said. "Bringing this expertise to China will provide economic opportunities for both the U.S. and China.”
